A Note on Regulatory Responses to COVID-19 Pandemic: Balancing Banks’ Solvency and Contribution to Recovery

Abstract

We see spikes in unemployment rates and negative economic growth during the COVID-19 pandemic. Governments are responding with aggressive monetary expansions and large-scale economic relief plans. We discuss the implications on banks and the economy of prudential regulatory intervention to soften the treatment of non-performing loans and ease bank capital buffers. We apply these easing measures on a sample of Globally Systemically Important Banks (G-SIBs) and show that these banks can play a constructive role in sustaining economic growth during the COVID-19 pandemic. However, softening the treatment of non-performing loans along with easing capital buffers should not undermine banks’ solvency in the recovery period. Banks should maintain usable buffer in the medium-term horizon to absorb future losses, as the effect of COVID-19 on the economy might take time to fully materialise.

Keywords: COVID-19, non-performing loans, capital buffers, solvency, G-SIBs

JEL Classification: G18, G21, G28